A Tale of Two Equity Mutual Funds

Posted On Wednesday, Apr 15, 2015


A fund’s performance is heavily dependent on the investment strategy followed by the fund manager. The kind of stocks the fund chooses to invest will determine if the fund delivers profits or makes losses. Moreover it is also important to understand if it is right to judge a fund’s performance by looking at its profit and loss chart. While it is subjective, in our view it is the investment strategy and the philosophy of the investment team that determines if the fund is on the right track.

The Quantum Long Term Equity Fund#
For Quantum Long Term Equity Fund QLTEF we follow the value style of investing, which means that we buy when we believe a company’s valuation is cheap relative to its long term earning potential and historical valuations and we sell when we believe a company’s valuation is expensive based on its long term earnings potential and historical valuations.

This analysis is done at a stock level and not at an Index level, basically meaning that we will look at the stock on its individual merit and not buy it merely because the markets are up, or other stocks in the sector are doing well. What we evaluate is the potential of the company, the transparency in its systems and the ability of the senior management of the company to drive it in the right direction.

Thus whenever our pre-determined buy limit for a stock is triggered, the company becomes part of the portfolio and whenever a sell limit is triggered we exit the stock. Whatever remains is cash. The last few months has seen us exit quite a few stocks as we believe they became more expensive relative to their investment value, raising the cash levels in the fund to a historic high.

High cash levels might be the cause of worry for some investors, but to us it is the evidence that the fund is performing as per our expectations!

Yes, rather, if the fund wouldn’t have such high cash levels we would be forced to believe there is something seriously wrong with the fund; since value funds will always underperform during frothy markets. It is their nature; the fall in its NAV during the rising market adds to our conviction that the fund is staying true to its promise to investors – that is to invest in markets only when we see value.

The Quantum Equity Fund of Funds#
But this is only with regards to QLTEF, on the other hand when it comes to Quantum Equity Fund of Funds scheme (QEFOF), which is yet another scheme of Quantum that invests in different equity schemes of other mutual funds, the principle is different. Although fundamentally both funds directly or indirectly invest in equity market, they have completely different investment strategies. Here’s what makes QEFOF a good investment in times when the markets are running up:

1. By investing in Quantum Equity Fund of Funds you don`t have to worry about which equity fund you should invest in to give your money equity exposure. It will automatically invest your money in suitable diversified equity funds.
2. Our processes ensure that we rebalance our portfolio adequately, giving you what is, according to us, the suite of the finest equity funds in India.
3. QEFOF invests in not just equity but diversified equity funds (i.e. the fund will not invest in a sector or a thematic equity scheme) which in turn, will invest your money across different sectors. This diversification helps to minimize the risk of investing in equities.
4. You can also start investing in equities with a sum that is as low as Rs. 500.
5. You can hold units in Demat mode too.

Thus we see QEFOF invests in different equity schemes of other mutual funds. Not necessary these funds follow the value style of investing like QLTEF. They might follow the growth style of investing, thus making the most of the rising markets. The result is that the performance of QEFOF is beating its benchmark successfully.
A point to note is that the QEFOF is treated as a Debt fund from a taxation perspective.

This brings us to a conclusion, which is to assure you, our investor, that your fund manager at Quantum is doing the right thing. We aim to achieve long-term capital appreciation and help you achieve your long term financial goals by doing the right thing, even if it means underperforming peers in the short run as in the case of QLTEF, or selecting those equity funds that are suitable for your portfolio in QEFOF.

Product Labeling

Name of the Scheme & Primary BenchmarkThis product is suitable for investors who are seeking*Risk-o-meter of Scheme
Quantum Long Term Equity Value Fund

An Open Ended Equity Scheme following a Value Investment Strategy
• Long term capital appreciation

• Invests primarily in equity and equity related securities of companies in S&P BSE 200 index.
Quantum Long Term Equity Value Fund
Investors understand that their principal will be at Moderate Risk
Quantum Equity Fund of Funds

An Open Ended Fund of Funds scheme Investing in Open Ended Diversified Equity Schemes of Mutual Funds
• Long term capital appreciation

• Investments in portfolio of open-ended diversified equity schemes of mutual funds registered with SEBI whose underlying investments are in equity and equity related securities of diversified companies
Quantum Equity Fund of Funds
Investors understand that their principal will be at Very High Risk

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Note: Risk is represented as:
(BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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